May 2002

Money Matters
Answers to Your Finance & Tax Questions
By John McGill, MBA, CPA, JD

Q My practice has grown in recent years and I would like to substantially increase the amount of money that I put away for retirement. Last year, I only funded an IRA contribution for myself and my wife, but my financial advisor is now recommending a Simplified Employee Pension (SEP) Plan. Do you think this is the way to go?

A Not likely. For most doctors, the next retirement plan they should establish once they have fully funded IRA accounts is a SIMPLE-IRA plan. Under this plan, the doctor - and each participating employee - can elect to defer up to $7,000 of their pay per year (in 2002) into a SIMPLE-IRA account on a tax-deductible basis. In addition, the practice makes a matching contribution equal to the percentage of pay deferred, up to a maximum of 3% of pay.

In addition, in situations like yours, we recommend employing your spouse in your practice, if possible. Provided that your spouse provides reasonable services in exchange for her compensation, she should be paid a salary. This will allow her to defer up to $7,000 of her salary into a SIMPLE-IRA account and will qualify her for the 3% of pay matching contribution.

While there are generally minimal set-up or administrative costs involved with both SEP and SIMPLE-IRA plans, the main advantage of the SIMPLE-IRA plan is much lower staff-funding costs. As a general rule, doctors sponsoring SEP plans must contribute the same percentage of pay for staff members as they do for themselves, resulting in contributions of 10% to 15% of pay on behalf of staff in many cases. In comparison, SIMPLE-IRA matching contributions are required only for those employees who participate in the program, and then up to a maximum of 3% of pay. Accordingly, many doctors find they will save thousands of dollars in staff funding costs by operating a SIMPLE-IRA plan rather than a SEP.

Q I have recently sold my practice and shut down my retirement plan, rolling the proceeds over into my IRA account. I am planning to wait until age 70 to begin drawing benefits from the IRA account, but I understand that the distribution rules have changed. Is this correct?

A Yes. Recently the IRS issued new regulations under Section 401(a)(9), substantially simplifying the calculation of the amounts required to be distributed from qualified retirement plans and IRAs. The new rules establish a single table that you can use to calculate your minimum required distribution beginning at age 701/2, by plugging in your age and the prior year-end balance of your retirement account or IRA.

The new rules eliminate the need to recalculate your life expectancy and determine a designated beneficiary by age 701/2. The new rules will provide greater flexibility for most doctors, allowing them to substantially reduce the required distributions in most cases. While the new table is applicable to virtually every situation, the regulations continue to permit a longer pay-out period if the beneficiary is a spouse and is more than 10 years younger than than the employee.

Mr. McGill is a tax attorney with McGill and Hassan, P.A., a legal firm in Charlotte, N.C., that specializes in financial issues. He formerly worked with the Office of Chief Counsel, the legal branch of the Internal Revenue Service in Washington, D.C.